Deferred Pleasures

Did you know that you don’t have to collect your pension when
you get to 60 (women) and 65 (men)? You can “defer”, which simply
means choosing not to have it.

Under the pre-April 2005 rules, you received an extra 1 per cent
added to your pension for every seven weeks that you deferred. The
longest that you could defer was five years. If you left your
pension unclaimed for that long, it would be 37.5 per cent higher
when you did claim. That isn’t bad. But, of course, you would have
missed out on five years’ worth of pension.

To give an example, George is due a pension of £82.05 a
week. He decides to defer, waiting for 42 weeks before claiming.
This will give him a 6 per cent increase, bringing his pension up
to £86.97 a week for the rest of his life. I’m not being
morbid, but he will need to live 13.5 years to get back the pension
he has not claimed since his 65th birthday.

So who would have considered deferring? Apart from people who
were convinced of their own immortality, it was usually only
worthwhile if a person was still working and their taxable
retirement pension would have taken them into the higher tax rate
band.

To make deferment more attractive, the government has decided to
change the rules. The deferment rate goes up to 1 per cent increase
for every five weeks. In addition, there is no longer a five-year
limit on the extent of deferment. If George defers his pension
under the new rules, he will receive £88.94 a week after 42
weeks’ delay, almost £2 a week more. Mind you, he’ll still
need to live over 9.5 more years to get back what he has missed
over those 42 weeks.

But the biggest change is that George, and all other pensioners,
can choose to take a lump sum at the end of the deferment rather
than an increased pension. The lump sum will be the amount of the
pension not claimed, plus compound interest (based on 2 per cent
above the Bank of England base rate), as long as the deferment
lasts for 52 weeks.

If you defer for less than a year (like George), and choose the
lump sum instead of an increase, all you get back is the unclaimed
pension with no interest added.

The lump sum will be taxable (as it is made up of taxable
income), but it won’t count as capital when calculating
means-tested benefits. But if you are likely to be claiming those
types of benefits anyway, you need to get expert advice about
deferment, because the higher pension that you eventually claim
will be counted as part of your income. This will reduce your
entitlement to pension credit, for example.

A person with a pension of £100 a week who defers for 5
years will get a taxable lump sum of £30,768 (assuming 6.75
per cent interest) or an extra £2,704 of taxable pension each
year. If they live for 11 years after deferment, the extra pension
is a better bet – although if they ever need means-tested benefits
such as pension credit or council tax benefit, the lump sum may be
a better choice.

So, approaching pension age, you have two choices – should you
defer, and if you do, should you take the extra pension or a lump
sum? It is an individual choice, but at least you now know that you
and your clients have a choice.

Gary Vaux is head of money advice, Hertfordshire
Council. He is unable to answer queries by post or telephone. If
you have a question to be answered please write to him c/o
Community Care.